Cryptos: Don’t count on NFTs for self-managed funds

The corporate regulator has been shutting down unlicensed businesses, including those engaged in unlawful activity targeting SMSF trustees.

Pictured is a Bored Ape Yacht Club NFT. The Bored Ape Yacht Club is a collection of 10,000 unique Bored Ape NFTs — unique digital collectibles living on the Ethereum blockchain.

Super fund returns for this financial year have been pushed into the red following a sharemarket rout triggered by rampant inflation and rising interest rates.

For those who hold crypto assets in their self-managed super fund, returns look even worse, with bitcoin and other digital currencies down more than 50 per cent since January.

In the crypto boom of 2021, there was a jump in online marketing recommending Australians switch from their retail and industry super funds to SMSFs for the purpose of investing in cryptocurrency assets.

But caution is advised: the corporate regulator has been shutting down unlicensed businesses, including those engaged in unlawful activity targeting SMSF trustees.

Alongside crypto, non-fungible tokens (NFTs) boomed in 2021, with prices rocketing through the year.

A subset of the crypto culture, NFTs are digital assets such as digital pictures. Each NFT has its own unique digital serial number so that it can be bought and sold just like a physical artwork.

In fact, the most expensive NFT sold in December 2021 for $US91.8m. Called The Merge, this digital asset was a picture of three white balls on a black background.

NFT investors argue that collecting NFTs is no different to collecting physical basketball cards and just an evolution of collecting in the digital age.

Just like a basketball card collector pays more than $1m for a rare Michael Jordan card which in reality is just cardboard, plastic and ink costing no more than a few dollars to produce, NFT collectors argue that digital assets with collectable properties can also justify large price tags.

But the shine has come off NFTs in recent months, correlating with the drops in crypto ­markets.

One of the most popular NFTs has seen a significant drop in value: the cheapest Bored Ape Yacht Club NFT, which is a digital picture of a funky ape, cost $US429,000 in April but has now fallen to $US91,000, representing a 79 per cent drop in value.

And experts are now questioning whether NFTs can even be part of a SMSF under the collectable category.

“The reality of NFTs being used in SMSFs may prove more difficult than it may appear due to strict compliance obligations surrounding SMSFs,” said Danny Talwar, head of tax at crypto tax calculator company Koinly.

“It may be that the benefits of doing so are outweighed by the disadvantages,” he warned.

There are several challenges in holding NFTs inside super. The first hurdle is to show that the sole purpose of buying the NFT is to provide a future retirement benefit and also show that the SMSF trustee is not gaining any personal use or benefit from the NFT.

Trustees need to be careful that they remain compliant with regulations given the lack of regulatory clarity, warns Oliver Woodbridge, a director at crypto tax specialist Tax on Chain.

“Trustees need to be mindful of whether they are receiving any present-day benefit or enjoyment from the asset,” he said.

“Some NFTs have a specific utility such as granting the holder access to real world events. If the SMSF members or their family are in any way benefiting from the NFTs held by the SMSF, for example by attending an event granted by the NFT or playing a video game using the NFT, the fund will be in breach of the sole purpose test.”

Another hurdle is to overcome the strict ongoing compliance and management requirements.

“Complexities may involve recording NFTs at market value to satisfy the requirement to maintain accounting records. Major cryptocurrencies on the other hand do have a market value which can be relied upon,” Mr Talwar said.

Additionally, the NFTs must align to the SMSF’s investment strategy, he noted.

“Other considerations include answering the following questions: does the asset have insurance and is it appropriately stored? Does the trust deed allow for investment in digital assets? Penalties for non-compliance can be very high.”

For many, the upcoming tax season will be their first time that crypto and NFT transactions will need to be accounted for.

The tax treatment of cryptocurrencies and digital assets can be complex and so it is always recommended to speak to a tax professional who is familiar with the rapidly evolving digital landscape.

James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au